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Cramer’s talked a lot about biotech companies recently and why they’re the right stocks to own in this slower economy, but he hasn’t spent much time on big pharma. For Tuesday’s show, he put his 10-point rating strategy to work to see whether Pfizer or Johnson & Johnson was the better drug stock to own.
At first glance, you might think that Pfizer [PFE
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] at $19 with it’s 6.5% dividend yield is a better buy than J&J [JNJ
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] at $70, not far from its 52-week high, and much smaller yield of 2.6%. But that’s not the case. We’re talking about drug stocks here, and what matters most when you’re valuing this sector is consistent long-term growth derived from that pipeline and patent protection. Based on these factors, it’s Pfizer that’s the more expensive stock.
Before we get to that conclusion we have to start at the beginning, though. And Wall Street money managers, upon whom Cramer’s rating system is based, always look at sector first because it accounts for 50% of a stock’s value. Historically, big pharma has been the sector to own when the economy’s slow, such as now. But a lack of new products and the loss of old drugs to generics are preventing this group from growing the way it used to. Plus, the Democrats hate big pharma, Cramer said, and there’s a good chance they’ll win in November. For that reason, JNJ and PFE both get three points out of a possible five.
Next we look at growth and consistency, and as we mentioned, this is were the pipeline and patent protection come in, as well as these companies’ ability to compensate for any losses in this categories.
In this last category, JNJ wins out because, unlike many other pharma companies like Pfizer, it never sold its consumer products business in favor of dealing purely with high-margin prescription medicines. Now that that prescription meds are lagging, JNJ is benefiting from that over-the-counter revenue while it works on generating some sales from products located behind the counter. Pfizer, which sold its consumer-products division to – guess who? – J&J last year has barely any other revenue streams.
When it comes to patent expirations, JNJ is bad, but Pfizer is much worse. JNJ will lose $3.8 billion worth of income to drugs going off patent, while Pfizer loses $6.6 billion – and one of Pfizer’s lost drugs, Lipitor, is its biggest franchise. Cramer awarded JNJ two points for winning both the product-mix category and this one for patent expiration. Score, 5-3, JNJ.
Next we’ll look at pipeline because, as Cramer said, drug development is big pharma’s endless task as it tries to replace lost growth. Pfizer expects to start 15 to 20 phase III tials between 2008 and 2009, with between 24 and 48 programs in Phase III by the end of 2009. And between 2010 and 2012, Pfizer expects to have between 15 to 20 submissions to the Food and Drug Administration. That’s a much bigger pipeline than JNJ has, which is an expected seven to 10 drugs for approval between 2008 and 2010. One point to Pfizer. Score: 5-4, JNJ.
Intangibles count, too. Cramer likes JNJ’s culture while he dislikes Pfizer’s lawyer CEO. Plus, Warren Buffett owns JNJ, which is always worth a mark in the pro column. So give another point to JNJ here. Final score: 6-4, JUNJ wins.
But what’s the market think of all this? JNJ trade at 15 times next year’s estimates versus Pfizer’s 7.7 times. As cheap as Pfizer looks, Cramer can’t recommend because it scored so low in its match-up against JNJ, yield or no yield. He said the JNJ market valuation is spot on, and he likes the stock. So just wait for a pullback below $68 if you decide to buy.
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